How To Pick the Right Focused Fund?

Do you seek a concentrated portfolio that could offer inflation-beating return? Are you looking for an investment to beat the benchmark index over the long run? You may consider investing in focused funds that put your money in stocks. According to the Securities and Exchange Board of India (SEBI) guidelines, it is an equity fund that invests in a maximum of 30 stocks. You can invest in focused funds if it matches your investment objectives and risk tolerance. How to pick the right focused fund?

What is a focused fund?

You have focused funds investing in stocks of companies across different sectors and market capitalisation. It has maximum exposure to 30 stocks rather than to 50-100 stocks as in the case of diversified equity funds. 

Moreover, the fund manager of a focused fund allocates assets between large-cap, mid-cap, and small-cap stocks without any restrictions across different sectors to maximise your return over some time. 

Should you invest in focused funds?

You can invest in focused funds only if you are an aggressive investor. It helps if you have an investment horizon of over five years. You must invest in focused funds only if you are comfortable with a concentrated portfolio of limited stocks.

It means you are willing to bear greater risk than diversified equity funds for a higher return over some time. You must invest in focused funds only if you are a savvy investor who understands the stock market. 

It helps if you stay invested for at least five years as the fund manager takes selective bets to maximise return over some time. 

Also Read: Should You Diversify Your Portfolio With US-focused Funds?

You will find a focused fund doing well during a broad-based rally. It means a large number of stocks are contributing to the market performance. However, the investment may not do well if the equity market rally is limited to a handful of shares. 

How to pick the right focused fund?

You may consider the AMC’s track record and the investment style of the fund manager to pick the right focused fund. Moreover, you must check if the fund manager has successfully rotated the portfolio depending on the changing economic conditions. 

It will help if you understand the market cycles, where a select focused fund may outperform its peers. However, you may find the same fund underperforming during shifts in the market cycle. 

You must select a focused fund based on the ability of the fund manager to pick the right shares. It is an investment in a handful of stocks, and even one wrong bet by the fund manager may result in a substantial loss. 

In simple terms, the fund manager’s ability to select and churn stocks according to market conditions helps generate higher returns over some time. You may select an AMC with large assets under management (AUM). 

This means the AMC has adequate funds to take advantage of the available opportunities and maximise returns over the long run. You must opt for a focused fund with a lower expense ratio to increase your take-home return. It shows the percentage of your investment channelled towards managing the mutual fund. 

It would help if you invested in focused funds through the systematic investment plan or the SIP. You invest in a staggered manner that helps you avoid timing the stock market. You must stay with the focused fund only if you have confidence in the fund manager’s ability to respond to shifts in the market cycle. In a nutshell, you must invest in focused funds only if you are a savvy investor who can stay with the investment for the long run.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in.